Should the UK follow IMF’s advice?

Here are two technical terms, before we get underway: fiscal multiplier and blinkered. A fiscal multiplier simply describes the relationship between government spending and GDP. Blinkered, which was a theory developed by Professor Obvious from the school of common sense, may apply George Osborne.

Here is some simple maths. Let’s say that for every pound the government spends on welfare and department spending, the economy grows by 60p. Let’s say that for every pound spent on infrastructure, the economy expands by one pound. Professor Obvious might suggest the following: spend less on welfare and departmental spending, and use the money saved to boost spending on infrastructure.

If you want to take a view from the ‘School of the Not Quite so Bleeding Obvious’ (SNQBO), then things change. What is true now may not be true tomorrow, next week or in, say, ten years’ time.

It does, however, feel as though the equations described above are roughly right at the moment.

Yesterday the IMF said: “The United Kingdom could boost growth by bringing forward measures already included in its fiscal plan, such as spending on infrastructure and job skills.”

Capital Economics reckons that if the government was to spend £10 billion in this way, it could cancel out the GDP dampening effect of its planned £6 billion cut on welfare and department spending for 2013.

The other benefit of investment into infrastructure, and indeed job skills, is that it can lead to improved productivity, precisely the area where the UK is so weak.

Furthermore, by taking money scheduled for expenditure at a later date, Mr Osborne could implement the IMF recommendations without worsening the UK’s public debt in the long run.

So why not do it?

One reason might be, and excuse the introduction of another technical term, the slippery slope. Osborne may fear that short term one-off initiatives have a habit of becoming entrenched. That is to say that theory might suggest we just need to take the money from planned future expenditure, but when we get to that future date, the government may find that it is still under pressure to spend that money.

By Michael Baxter

An entrepreneur with well-honed business acumen, Michael Baxter writes on a wide range of economic and socio-economic issues. He launched the Investment and Business News Daily Newsletter in January 2003. Since then, Michael has written over 2million words on all things economics. The newsletter is read by thousands each day.